Combine purchasing and logistics for success

KNOXVILLE, TN:A report by the Global Supply Chain Institute at the University of Tennessee suggests companies that closely integrate their purchasing and logistics functions are more successful.

However responses from more than 180 supply chain executives, representing companies of over $20 billion to under $100 million in size, show that many fail to capitalize on this opportunity and have supply chains where purchasing and logistics operate in non-cohesive silos.

"Together, purchasing and logistics can account for 70 percent of an organization's costs and influence 80 percent of its working capital through inventory and accounts payable," said Ted Stank, UT Bruce Chair of Excellence and one of the study's authors. "Clearly, purchasing and logistics have a huge impact but often won't collaborate with each other to make decisions that will positively impact the firm's overall performance."

According to the study, metrics that are used to measure and reward performance drive decisions that are often geared to short-term financial gain.

"When the purchasing and logistics functions are merged together, companies may realize increased levels of functional and financial performance such as greater efficiency, reduced complexity and lower operating expenses, cost of goods sold and inventory," said Mike Ray, vice president, business integration and transformation, IBM Integrated Supply Chain. "We hope the best practices in this white paper will help companies to transform and evolve all aspects of their supply chain like IBM did over the past decade."

The report identifies four keys to success: Creation of an end-to-end supply chain organization integrated with common metrics; a talented unit that rewards people for in-depth mastery and supply chain leadership; a purchasing and logistics network with an operating decision framework based on best overall total value of ownership (TVO: total cost of ownership plus level of customer value creation); and effective information systems and work processes that enable superior business results.

"High-performing companies are able to bend the chain—whose links include planning, sourcing, making and delivering—to better align the purchasing and logistics functions," added Stank. "As a result, they are able to serve their customers better."